One stronger predictor of positive share price moves is correctly anticipating when a sector or stock that is unpopular will become popular. After all, as legendary investor Benjamin Graham said – “in the short term, the market is like a voting machine….”

Of course, he then went on to say “…however in the long run, the market is like a weighing machine” neatly summarising the philosophy behind his value based approach to investing. As many investors have discovered, one of the challenges to value investing is that it may take years for the market to give sufficient recognition to a share that is held as a value proposition.

Why shouldn’t investors take both propositions into account? A stock in an unpopular sector that is trading at a lower, potentially good value share price could deliver in both the short and the long term.

One of the puzzles of the economic upswing of the last few years was the failure of consumers to embrace the animal spirits of better conditions, and particular house prices. Naturally, many consumer stocks underperformed. When markets turned ugly in the last quarter of 2108 these same stocks were pulled down as well, and analysts doubled down on their cautious to bearish views on the sector. Throw in a profit warning, or just a conservative outlook, and there’s a perfect storm.

Which brings me to Costa Group (CGC). A profit warning in early January saw CGC shares slammed from above $7 to near $4. They’ve recovered somewhat since, and the lower share price may be an opportunity for long term investors to take a stake in a consumer exposed growth story. The two year citrus cycle may be a catalyst for further share price recovery.

Another on my radar is Lovisa (LOV). It’s a speciality, fast fashion, bricks and mortar retailer. While the future of retailing is up for grabs as online businesses disrupt, LOV is going a different way. The innovative approach is a higher risk, potentially higher reward investment. If time proves LOV right their share price could regain 2018 highs close to $12.

In August last year, the US president tweeted: For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming! And many investors cheered in response.

This euphoric message was uncanny in its precision – in calling the market top. The global sell down in shares started soon after, and the S&P 500 index dropped 19.8%, just shy of the technical definition of a bear market . Sentiment at extremes can be a signal of an impending market change.

Fast forward just four months, and sentiment has swung to the other end of the spectrum. Analysts are calling for a US recession in 2020. The old credit-crunch-in-China story is getting yet another run. The president of the European Central Bank warned on slowing growth, and click bait “news” sites are spraying their pages with “looming disaster”, “slammed” and “meltdown”.

This might mean that the lows hit between Christmas and New Year are a turning point for share markets, and a new bull run is beginning. The chart shows that the technical picture has improved dramatically.

The rally broke the downtrend and lifted the Australia 200 index over the short-term support/resistance at 5590, and the long-term level at 5640. These levels take on added significance. A fall below these points could mean further damage. However, while the market holds above these levels, in my view, the risks are on the upside, with potential for a move towards the zone between 5640 and 6000. Any break through 6000 would bring into view the 10-year high around 6375.

Capturing higher portfolio returns over the long term depends on many factors. One of them is knowing which markets narratives to track because ultimately markets are moved by the shift in balance between buyers and sellers. The changes in understanding that cause investors to act are a key to market direction. It’s important that investors identify the most influential market stories, given the impact of sentiment.

The current freeze on government spending in the USA is a good example. While the US government shutdown is potential political dynamite, and generates lurid headlines, the global economic impact is far less significant. The shutdown means that a lot of spending is deferred, but not destroyed. There are parallels when a gold mining company experiences operational delays. The value of the gold in the ground doesn’t change, but the income from selling that gold is delayed. This is a negative, but generally a minor one.

If the closure drags on for months, the situation may change. The risk for markets is more indirect, in that it may affect sentiment. Nonetheless, most professional investors are largely unconcerned.

Economic growth, and in particular the growth outlook in Europe, China and the US, remains at the heart of market performance. The argument is now about the outlook for 2020, with some suggesting a tanking US economy will drag the world into another recession, given a slowing China economy and a moribund Europe. This is a factor in recent increases in volatility. Because the discussion is about events in the distant future, hard evidence is scant. Sentiment and positioning become more important in determining day-to-day market moves.

The events that speak to this narrative in the near future are the US/China trade talks, the coming earnings seasons and Brexit. Investors may prepare for any event or change in story that pushes the Australia 200 index through the levels highlighted above.

The principles of successful investing are very straightforward. Cut losses, run profits. Any investor who can jump out of losing positions cheaply, while sticking with winners, will do well over almost any time frame.

The challenge is in implementing the principles. Cutting losses and admitting we’re wrong runs against our nature. Similarly, it’s human nature to jump on a profit, rather than allowing it to run. Overcoming our own instincts is one of the single most important challenges on the path to a high performing portfolio.

It’s one of the reasons why some market professionals seek “asymmetric risk”. An investment where potential losses are limited, and potential gains are significantly larger, offers a better opportunity to cut losses and run profits. While many of these one-sided investment exposures are constructed using options, investors don’t need a degree in rocket surgery to identify these types of opportunities. A good example is the current situation in The Reject Shop shares (TRS).

In an announcement on 21 November, the Allensford Unit Trustee announced an on-market takeover bid for TRS. Apart from stirring nostalgia in still extant older brokers (most takeovers are off-market bids these days), it raised a number of important considerations.

Naturally, TRS shares immediately rocketed higher. However, an on market bid means the bidder will stand in the market at the bid price ($2.70 per share) until a specified date, which in this case is 7 January 2019. That date may be extended, at the discretion of the bidder. The TRS board has recommended that shareholders reject (*ahem*) the takeover bid.

TRS shares are trading around $2.75. The backstop of the takeover bid means investors buying at this price have a limited loss potential of 5 cents per share, at least until 7 January. They can simply turnaround and sell into the on-market bid at $2.70. However, if another bidder emerges, or the shares simply recover some ground lost over the last nine months, a TRS shareholder may see significant further gains. This limited loss, higher potential profit structure is a neat example of the one-sided risk that can deliver portfolio outperformance over the long term.

Oil prices are off more than US$25 a barrel, or 33% plus since early October. Recent price action in West Texas Intermediate and Brent crude oil (the main US and European grades respectively) shows the first positive signs in months. Both look more solid, and have bounced off key technical price levels. And of course the time for investors to take energy exposures is when oil prices are nearer lows than highs.

Stocks like Woodside, Oilsearch, Origin energy are on some investors’ radar. Santos is the major energy stock considered most leveraged to the oil price, and its recent acquisition of Quadrant energy improves its overall asset portfolio. However there is another way to gain exposure to a rising oil price.

The engineering groups that provide services to the oil and gas industry are also leveraged to the oil price. When oil prices are rising, producers look to bring more reserves on line, increasing the demand for services. The reverse is also true. Worley Parson (WOR) is one such group. A placement to fund the purchase of Jacobs Engineering has seen its share price fall more than 35%, compared to the 20-30% falls in major energy stocks.

The acquisition in my view enhances the longer term appeal of WOR. However the stock suffered digestion issues as the market absorbed the share placement. The late October transaction occurred against a backdrop of tumbling oil prices, a potential explanation for the fact that around half of all retail investors did not take up their entitlement under the offer. This overhang contributed to WOR’s drop back to the 2018 lows.

The shares that formed part of the acquisition were issued to Jacob’s shareholders at $16.92. Institutional and retail investors paid $15.56. The digestion issues around the share placement mean investors can buy WOR at prices close to $14 per share. In my opinion, this represents an opportunity to take leverage to any upside in oil prices in an energy industry service provider that has recently significantly increased its market share, and vastly improved its investment profile.

Nearly every investor has heard the old markets saying; “Buy straw hats in winter”. Like many principles of successful investing, it’s easy to say, and much harder to do.

The best time to buy a stock, or a market, is when it’s at its lows. The difficulty is that the lows occur when fear is at its highest. As human beings, our instincts are to run with the pack, not against it. Fear of financial loss and embarrassment are key factors that prevent investors from acting at the potentially most lucrative times.

Investors can help steel themselves to buy at the best times in a number of ways. One is to have a watch list of highly desirable stocks in anticipation of a share price fall. Alumina Ltd is a stock on my watch list, and has suffered a significant drop as aluminium prices declined from a peak earlier this year. Ding ding.

The production of aluminium is a multi-stage process. Bauxite is mined, refined into alumina, and then smelted into aluminium. AWC is involved in every step, through its 40% stake in a joint venture with Alcoa in the US. Aluminium is a key industrial metal, but the highly power intensive production process meant the industry was shunned as part of the shift away from fossil fuels. In my view the world is underinvested.

That’s why AWC is looking good to me at current share prices. While wary of dividend traps, if AWC merely matches its last two dividends in the coming year, it will yield around 15% (including franking). Even a halving of dividends will still result in a return better than 7%. The chart shows a support level at $2.17, just below current prices. The recent down draft in base metals and concerns about global growth generally are the fear factors weighing on the price. Despite the risk of looking foolish, in my opinion it’s time to step up to the plate in AWC.

Nearly every investor has heard the old markets saying; “Buy straw hats in winter”. Like many principles of successful investing, it’s easy to say, and much harder to do.

The best time to buy a stock, or a market, is when it’s at its lows. The difficulty is that the lows occur when fear is at its highest. As human beings, our instincts are to run with the pack, not against it. Fear of financial loss and embarrassment are key factors that prevent investors from acting at the potentially most lucrative times.

Investors can help steel themselves to buy at the best times in a number of ways. One is to have a watch list of highly desirable stocks in anticipation of a share price fall. Alumina Ltd is a stock on my watch list, and has suffered a significant drop as aluminium prices declined from a peak earlier this year. Ding ding.

The production of aluminium is a multi-stage process. Bauxite is mined, refined into alumina, and then smelted into aluminium. AWC is involved in every step, through its 40% stake in a joint venture with Alcoa in the US. Aluminium is a key industrial metal, but the highly power intensive production process meant the industry was shunned as part of the shift away from fossil fuels. In my view the world is underinvested.

That’s why AWC is looking good to me at current share prices. While wary of dividend traps, if AWC merely matches its last two dividends in the coming year it will yield around 15% (including franking).Even a halving of dividends will still result in a return better than 7%. The chart shows a support level at $2.17, just below current prices. The recent down draft in base metals and concerns about global growth generally are the fear factors weighing on the price. Despite the risk of looking foolish, in my opinion it’s time to step up to the plate in AWC.

Trade wars, US elections, rising interest rates and debt fears. There’s plenty for investors to worry about. Yet many of these market risks are long standing or were well known ahead of time. The market focus on risks may have as much to do with the time of year as the underlying fundamentals.

There are many studies that show there is a seasonality to share market returns. Andrew McCauley at Veritas is one of my favourite quants. His analysis of the Australian share market since 1955 showed the period from May to October underperforms the period from November to April. Interestingly, the same seasonal bias holds for many northern hemisphere market measures, including the US S&P 500 index.

The numbers don’t lie – the bias is real and statistically significant. Explaining why it occurs is a completely different story. Given the effect occurs in both hemispheres, it’s not feasible that it relates to weather patterns or seasons. Tax years also vary from country to country, making it an unlikely cause. And the pattern existed before there was a high degree of international investment, suggesting the activities of one nation or group is not responsible.

Whatever the reason, we are now at the seasonal turning point. A number of factors that are of concern to investors may resolve, or invite a different interpretation. The US midterm elections are a case in point. Investors appear quite comfortable with the change in control of the US House of Representatives, despite the problems that Republicans will now have in prosecuting their stimulus agenda. Instead, the market narrative revolves around the potential for US rates to remain lower for longer.

This positive interpretation of a lowering of growth prospects could indicate a sentiment shift, and may reflect the move into a more positive period for shares. This has important implications for Australian investors. If US markets resume their upward march, it’s likely local markets will follow. And the Australia 200 index is right in the middle of a decision zone:

If price action is primary evidence, this longer- term chart of the index gives clear guidance on the important levels. For at least three years, the support and resistance levels at 5640 and 6000 have proved important, and with the market sitting about halfway between the two, there is potential for a clear signal of the market direction over the coming days and weeks.

Seasonal effects do not kick in every year, but if sentiment is shifting to positive, we could soon see a test of the 6000 level. A move up through this point would suggest positive momentum into year-end, and a potential test of the post GFC highs around 6375.

Many long-term investors are advised to look away from the markets. Market “noise” can be a distraction from enacting a sound investment strategy. Instead, they are advised to check their portfolios on a monthly basis, or even less frequently, remaining focussed on their long-term goals.

However, there are times when investors should pay attention to what the movement of the market is saying. And with the Australia 200 index at an important inflection point, now is one of those times. The movement of the main index over the coming days and weeks may set the market direction for months to come.

The chart below gives a longer-term picture of the market performance. Each of the black candles represents a week’s trading. The red line is the 6,000 level. Until late last year this was the post GFC high water mark. The market failed to break through on a number of occasions. This resistance level became a support level once the market broke through.

The green upward sloping line defines the overall up trend in the market since early 2016. On previous sell downs, the index has bounced off these levels. However, if the index breaks through this trend line (currently around the 5930 mark) it points to the end of an uptrend and potentially a market tumble.

The MACD indicator at the bottom of the chart is adding weight to this possibility. Not only is it nowhere near an oversold position, the increasing red gap between the signal lines is describing increasing downward momentum.

The good news is that the Australian economic fundamentals underpinning the recent gains remain solid. Whether its trade wars or rising interest rates that acts as a trigger for a sell down, neither is likely to represent a threat of the magnitude of the GFC. This brings us to the yellow line on the chart at 5640. This is an important support level, and largely contained the market downside throughout 2017. In my opinion, this level represents a potential turning point if markets do sell down.

Of course, the support represented by the 6000 level and the uptrend line could hold, and the market may bounce from current levels. If this occurs, investors may consider adding to stock holdings on the view the market will test the 10 year highs around 6380. The next few days should tell.

Australian investors frustrated by state government moratoria on Coal Seam Gas production have alternatives. Unfortunately this means investing outside Australia, and in the case of Tlou Energy (TOU), well outside. Serowe, Botswana to be precise.

In a carbon constrained universe, gas is a viable answer. It is the only existing lower carbon content alternative with sufficient scalability to power homes and industry economically. In Australia, the politics of CSG are toxic. However, in emerging economies, it is not only a compelling option, in many cases it’s the only option.

TOU is tendering to provide power in Botswana from a methane field. The gas discovery is ready for initial production drilling, expected to commence in October. TOU’s plan is to build a power plant at the site that will start producing 2 megawatts of power, ramping up to 10 megawatts. A 100 km transmission line will be built to link the plan to the national power grid.

Some caveats are required. Clearly, this is a higher risk investment proposition, starting with sovereign, geographical and development risks. The stock is also listed in London. Many large mining companies find UK investor pessimism weighs on the share price. Additionally, the writer holds shares in, and is biased towards this company.

Here’s the chart:

TOU is trading close to support at 10 cents per share, well down on January 2018 levels closer to 30 cents. News flow around a successful tapping of the gas field could act as a catalyst to the share price, and that in itself could attract shorter-term trading participants.

However I’ve added TOU to my portfolio with a longer timeframe in mind. Much of Africa is undergoing significant change, and the continent’s wealth of resources is well established. A company that establishes a reputation for power delivery using local human and physical resources may find long-term demand and opportunity in the more stable societies of Africa. Does any else recall Woodside Petroleum’s humble beginnings on the North West Shelf?

When BHP spun its unwanted operations off in 2015, a number of market wits labelled it “Crapco”. BHP investors, who received South 32 shares for free, bailed out. After an initial six month sell down, South 32’s shares quadrupled from their lows.

South 32 is politely described as a diversified metals and mining company. It produces alumina, aluminium, coal, manganese, nickel, silver, lead and zinc. Apart from coal and aluminium, most of these products are nearer cycle lows. Despite this conservative positioning and a relatively low leverage, South 32 is trading at an unstrained forward Price to Earnings ratio around 10 times.

On August 23, South 32 reported an 8% increase in profit for the full year. Management issued slightly increased guidance costs, as part of an outlook statement some analysts view as cautious. Reactions were mixed, with the stock subject to both upgrades and downgrades. The stock had traded down into the announcement and has bounced since, albeit with higher volatility.

The Materials sector is one of the “cheapest” on the market by traditional measures, such as P/E to Growth, and Enterprise value to Earnings. Surprisingly, it also has one of the higher sectoral expected returns. South 32 is shunned by some because it is expected to see lower earnings from 2021 onwards. However in the short term, it has stonking free cash flows that are likely to find their way into shareholders one way or another.

Further there is evidence this week that the trade dispute is turning in favour of China. Reports that the US is now seeking trade discussions and that China is has battened down the hatches in preparation for a prolonged disagreement may see the performance gap between the S&P500 and the Shanghai composite closing. This potential evidence of a stronger China is supportive of metals and coal prices. The twitter silence on trade from the Oval Office is ominous for the US.

South 32 could be just the ticket as the tide turns, especially for investors who are underweight growth exposure but blanch at the prospect of paying eye-watering multiples for tech darlings.